September 28, 2008

Any new student of accounting gets bewildered by the historical cost concept. The premise of this being that long term assets should be reported on the books at the value that they were bought at (apart from depreciation etc). The most commonly used example is that of land – land is usually reported on the books in the US system at the cost at which it was bought at. Land being such, usually appreciates and thus in the course of time, the value on the books ends up being being below the market value and firms are forced to report less assets than they have.

However, in recent years, firms have been allowed to report financial assets at market values instead of historical costs. For sometime this was considered a good idea, but in recent months has become the cause of much debate thanks to the credit crisis. The Economist last week had a great article on problems related to the same. An interesting point that the Economist brought out and which this writer was not aware of was

Today the treatment of a financial asset is determined by the intention of the company. If it is to be traded actively, its market value must be used. If it is only “available for sale” it is marked to market on the balance sheet, but losses are not recognised in the income statement. If it is to be “held to maturity”, or is a traditional loan, it can be carried at cost, subject to impairment. This is a dog’s breakfast. Different banks can hold the same asset at different values.

Noe this is indeed terrible. A big part of the problem recently has been one of the adverse selection problem. The only way around adverse selection problems is to reduce the level of assymetric information when it comes to dodgy products. Of course, this is easier said than done.

UPDATE: Justin Fox of Time has an interesting update on what’s happening on this front currently.

September 27, 2008

Life was bad for Barack Obama. Sarah Palin was the latest offshoot of America’s obsession with celebrity and had quickly bumped Mr Obama off the covers of Time and Newsweek as he duly observed on Letterman. Then fortunes changed and America’s misery became his godsend. Thus for the last one week, it has been rise rise and more rise on the polls for him. The impressive Nate Silver on 538 gives him a very sound chance of winning now. All said and done, and as long as Russia does not sell some nukes to Iran while Chavez and Raul hold a carnival on the waves of the next big hurricane in the gulf in the next few days, chances are that the dems may actually win, $700billion or not. We’ll see how the dollar does when we get there but a pint would be a nice celebration on the 4th. Or he may not and we will drink to forget the pain while anticipating four years of funny faux pas a la Mr Bush by Ms Palin.

However let’s look at how we will get there. In a year when by all benchmarks, the democrats should win easily, they’ll barely win. Or not. The popular vote would be very close to 50%. Isn’t this the year of the democrats when America’s standing in the world is probably as low as it has ever got, the economy at home is terrible (to use a mild term), the war and everything the republican establishment has been a debacle and a lot of corruption and mismanagement dogs the GOP. Instead, we have a crazily close race. Granted that McCain’s biography makes for impressive candidacy. Granted that there may be some of the Bradley Effect on show. Granted that the women vote is a little chaotic thanks to the Clinton tussle. Granted Obama’s experience runs a little thin. But this should still be the year of the democrat and none of this should matter enough. Especially if there is a solid base. And that is the big if.

Starting with Nixon’s astute observations of the silent majority and the honing of this idea to perfection over the years, Republican strategy has rested on the three pillars of social conservatism and religion, fiscal conservatism and hawkish foreign policy. The democrats on the other hand provide a socially liberal agenda and economic equality on their menu. The republican base is thus defined by either folks who are very religious, reasonably rich or the military types. The democrats offer little to the military hawks if that’s all they care about. The rich again care about their money most, they can always fly to Europe for their next abortion. Neither of these is that large in numbers. That leaves the folks who form the silent majority – most of these are either the rural libertarian types characterized by the south and the midwest or the lower middle class characterized by union workers.Both these groups tend to be less affluent and highly religious. However, the rural folks tend to do their own thing and many times do not care much or need much of the government. They tend to form a solid base for the republicans. On the other hand, the dems cater to the union types. Unfortunately for them, while their socialist ideas do appeal to this crowd, their socially liberal agenda does not appeal to the religious sensibilities of these voters. Thus instead of having a solid base among these voters, we have a case where these voters relate to some values from the democrats and some from the republicans, forming a good swing vote for the democrats to lose and the republicans to win. Thus in a year when things are going well for the GOP, there is no way they can lose. In years when things are not so great such as 2004 and now, they can still put up a darn good fight and maybe even win.

This problem simply arises because the vote bank the liberals cater too is just not that solid. To the poor and less educated, liberal ideals just do not appeal as much. Nor do environmental concerns and such. While the dems are dogged by other issues and the perception of condescending city boys, the primary reason I think is just this. The dems need to cater thei union base and make it stronger. Opposing everything that the GOP promotes is not the way to go. Compromises can be made on smaller things so that the essence of their big issue values still remains. Thus the democrats can go easier on say gun rights – allow guns while setting up programs for better training. Reach an agreement on gay rights so that they get similar privileges without giving it the exact same status as marriage. This would still be a step forward. Talk tough on foreign policy, the GOP does not do more than that either. The key is compromise. A combination of populist economic policies along with a not so far left social agneda will serve them much much better. Thus Nancy Pelosi must go. Also, use the four years in between to drive home these messages. Do a rebranding of the party – air commercials during non-election periods highlighting their makeover. Only then would we see a lot more blue states on the map instead of purple. But then, maybe I would be more red than purple by then.